Monday, June 29, 2009

Is There Opportunity in the Market?


So often, as I work with traders, I'll see them struggle to formulate an opinion: are we going higher, or are we going lower?

As the morning market today has shown us, the answer to that question is sometimes "None of the above."

Note the sharply declining volume, identified by the blue arrow. As volume has come out of the market, volatility has narrowed to the point where there has been little short-term opportunity.

Understanding that volume-volatility connection is key for active traders. When volume decreases, it means that the large, directional players in the market are relatively absent. What remains are market makers and scalpers who play for ticks within narrow ranges, making money between bids and offers.

When volume comes into a market, we don't just get more of the same trade; we get a qualitatively different trade, because that added volume typically reflects a certain kind of market participant. Knowing how much trade is occurring is a good clue as to who is trading--and that is an excellent tell for how much movement we can expect.
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5 comments:

beeba said...

Indeed. Here are some data from the ESU9 at of about 14:48, broken down in 1-min intervals:

Mon Jun 29 14:46:24 2009
92175: 0 x 14
92150: 135 x 354
92125: 163 x 194
Bid / Ask Ratio: 0.53
Interval Volume: 860
Total Contracts: 45096.

Mon Jun 29 14:47:24 2009
92150: 49 x 217
92125: 25 x 0
Bid / Ask Ratio: 0.34
Interval Volume: 291
Total Contracts: 45387.

Mon Jun 29 14:48:24 2009
92150: 0 x 41
92125: 80 x 0
Bid / Ask Ratio: 1.95
Interval Volume: 121
Total Contracts: 45508.

There was an earlier spike around 9000, but I haven't seen anything like that since. Quiet afternoon.

OKL said...

While traders (including myself) usually lament missing moves that take place during breaks... this is one of the days that makes taking breaks very worthwhile.

I missed the morning rejection into yesterday's ranges, waited awhile and decided to take a break with the low volume.

Came back three hours later at 1400et and the market does nothing much worth noting... the only thing i see is a big buy order at 920.5 that has been sitting there since i don't know when.

I did peek at my screens during the 3 hour break, but quickly turned away when i saw the volume was non-existent.

As weird as it may sound, I think its fair to say that not trading is a very sound strategy today.

Even my grandmother runs faster than this market.

(Oh, the buyer shifted his order up to 921.5)

*keyboard cat*

LJS said...

With the reduction in volatility, is anyone looking at different products to trade? FX, bonds? Overseas mkts perhaps? How about just trading the 1st and last hour? Any thoughts on what professional/successful traders are doing would be appreciated.

bruce said...

"Understanding that volume-volatility connection is key for active traders. When volume decreases, it means that the large, directional players in the market are relatively absent."

How true. Yet all through history, including current times, we are deluged with negative stories about how short term speculators cause all the havoc in oil and everything else.

Damien said...

Thanks for the great insight, Dr. Brett! I saw a lot of people on StockTwits pay their broker today.